Research and Statistics

Appeals court rejects $7.25 billion swipe-fee settlement


An appeals court overturned a 2012 swipe-fee settlement that allowed merchants to surcharge Visa and MasterCard credit card transactions

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An appeals court has thrown out a 2012 settlement that allowed retailers to charge consumers extra for Visa and MasterCard credit card transactions.

Under the settlement, retailers were allowed to impose surcharges of up to 4 percent to recover Visa and MasterCard swipe fees. They were also awarded $7.25 billion in compensation for past fees.

However, retail groups said few if any merchants made use of the credit card surcharge rights, so consumers will see little or no benefit from the ruling at cash registers.

“It’s not a practice retailers were necessarily enthusiastic about taking advantage of,” said Brian Dodge, spokesman for the Retail Industry Leaders Association. “I’m not aware of any that do.”

In their antitrust lawsuit covering 12 million merchants, retailers argue that card networks limit competition and drive up swipe fees that retailers must pay. The rejection of the settlement leaves merchants free to seek court action that could reduce swipe fees, or negotiate a new agreement with the card networks.

For merchants that accept Visa and MasterCard, “No one disputes that the most valuable relief the settlement agreement secures … is the ability to surcharge at the point of sale,” the U.S. Second Circuit Court of Appeals said in its decision.

However, the ability to surcharge faced practical difficulties, the court said. For one, surcharging is barred by state law in 11 states, although some of those bans are under court challenge. Secondly, the settlement says retailers must impose surcharges on all cards if they avail themselves of the right. Since American Express prohibits surcharges, retailers that also take AmEx cards couldn’t impose them on any cards.

Retail groups hailed the appeals court ruling, saying the settlement would have provided legal protection for card networks to continue costly price-fixing.  In their court claim retailers estimate they pay $30 billion a year in swipe fees to the two card networks.

“These fees drive up the price of retail merchandise, costing the average family hundreds of dollars a year in added expenses,” Mallory Duncan, general counsel of the National Retail Federation, said in a statement. He called the settlement a “backroom deal” that lacked broad support among retailers.

MasterCard spokesman Seth Eisen said the company is disappointed by the ruling, after more than four years of negotiation went into the now rejected settlement. “We are reviewing the decision to determine our next steps,” he said in an emailed statement.

The case divided 12 million merchants into two classes, those that accepted Visa and MasterCard from Jan. 1, 2004, to Nov. 28, 2012, and those that continued to accept Visa and MasterCard after Nov. 28, 2012. The first group received the cash payment, while the second received changes in card network rules, including the surcharge rights.

The appeals court ruled that the two groups of merchants had different interests and should have been represented by different counsel. In addition, the settlement allowed card networks to resume their restricted practices in 2021.

The appeals court reversed the district court’s December 2013 approval of the settlement, and overruled the class certification of the two merchant groups.

“Class counsel stood to gain enormously if they got the deal done,” the appeals court said, citing the $544.8 million in legal fees approved by the district court. The $7.25 billion settlement payment would have been the largest ever in an antitrust class action.

U.S. Sen. Richard Durbin, D-Ill., applauded the appeals court ruling as a victory for consumers and small businesses. “This swipe fee settlement would have been a stunning giveaway to big banks,” he said on Twitter.

See related: More merchants adding credit card surcharges


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